Is a second appraisal required for an FHA loan when a property is flipped?

This comes up for FHA deals when investors purchase properties and then “flip” them. I’ve seen quite a few flips in the Sacramento area over the past year (yes, even in this economy). I hope the information below proves helpful in case you are wondering when a second FHA appraisal is required during a flipping scenario. Verbatim from HUD:

FAQ : Is a 2nd appraisal only required under the Property Flipping Rule?

Solution Details : Under property flipping guidelines, a lender must obtain a second appraisal by another appraiser if:
1. the re-sale date of a property is between 91 and 180 days following the acquisition of the property by the seller, and
2. the resale price is 100 percent or more over the price paid by the seller when the property was acquired.

When a second appraisal is required

  • It must be completed by a FHA Roster appraiser selected by the Direct Endorsement lender that is underwriting the loan.
  • The cost of the second appraisal may not be charged to the borrower.
  • The lender must not request a second case number in the FHA Connection for the purpose of obtaining the second appraisal and is to independently contact the appraiser.
  • Only the information for one appraisal may be entered into the FHA Connection appraisal logging screens, which is the appraisal that is relied upon to determine the maximum loan amount.
  • Copies of both the first and second appraisals must be included in the case binder submitted for insurance endorsement.

ML:09-48  Handbook 4155.2: 4.7, 4.7.f, 4.10.b-c

If you have questions or any appraisal needs, feel free to contact me at 916-595-3735 or ryan@LundquistCompany.com.

Comments

  1. Dan Eichhorn says

    So when the property is resold in less thann ninety days and over for over 20%, but less than 100% over previous sale, is a second appaisal required and if so can the borrower pay for it?

    • says

      I’d check with HUD on that one, Dan. Seemingly you wouldn’t fall under the rule for a second appraisal needed, but you never know what they’d say (or how the lender will understand your situation – they might want a second appraisal anyway – you never know). I might suggest you give HUD/FHA a call at 800-CALL-FHA for the definitive word. They are actually reachable and easy to talk with also. When I am hired to do these types of appraisals it is usually the lender paying me. A check did come from the Borrower once, but I don’t think it should have per HUD standards. HUD rules do state that the Borrower is not the one to pay for the second appraisal.

  2. Lesley Jacques says

    I just got a request for 2nd appraisal on a property that I am not doing a cash out refinance it is a longterm hold, therefore no flip is happening. It was not appraised at more than 100% of the purchase price and they have asked me to pay for the 2nd appraisal.

    surely this is outside all of the guidelines??

    Lesley

    • says

      Hmm, you may want to speak with your lender about that. Maybe they are aware of a loophole in the rule or it doesn’t apply in certain situations??? Talk to them, but before you do call your lender, make sure to call 800-CALL-FHA to explain your situation and get the absolute correct information (they’ll even email you documentation from their handbook so you can share with your lender). FHA/HUD is very easy to reach and they are highly personable at this number too. Best wishes and do keep me posted if you remember.

  3. says

    Thanks, Ryan, for always providing informative topics for the Internet public as well as real estate professionals. Please keep up the good topics for people to read. I also encourage other real estate professionals to share experiences within their local market. Albert Cheney, Mobile, Alabama, “The Mobile Bay Metro Area.”

  4. Emerson Racca says

    When two appraisals are done for an FHA loan, the lender takes the lesser of the two appraised values. If there is a large discrepancy in valuation, is there recourse for the seller?

  5. Emerson Racca says

    Hi Ryan. I never called HUD regarding the second appraisal, but I did sell the property to a cash buyer for MORE than the low value. I think the appraiser needs to be retrained. He obviously does not know what “Fair Market Value” means. If three FHA buyers were willing to pay more than the low value, what does that say about his valuation? I think a better system is in order. For example, if two appraisal amounts differ significantly, then either a third appraisal should be required or at least require the two appraisers to share notes and come up with one that both agree.

    • says

      There may definitely be a need for a new system. I think many people are not happy about how the system is set up right now because they feel stuck when there is a “low” appraisal. Sometimes FHA offers do come in higher than conventional or cash offers though because they are padded with concessions and the buyer has a feeling of less risk because they only have to put 3.5% down. I say this because sometimes FHA offers might actually be above market value. Ultimately, there are so many factors to sift through in determining what market value is. In your case I’m glad you found an all cash buyer because there were at least 4 offers above the appraised value. That does make me wonder…. Take care Emerson. Good luck on your next deal.

      • Emerson Racca says

        I think the key here is the fact that two independent appraisals were done and one met list price and the other one did not. The difference from list to low appraisal value was $10,900.00.

        With the cash buyer, I even played hardball. He asked for multiple concessions, but he ended up buying it anyway when I refused to give him any. The selling price was $5000.00 above the low appraisal value.

        If “fair maket value” is the objective of an appraiser and it is “based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market”, then the low value was obviously incorrect.

        • says

          In situations like this it makes me wonder what a third appraisal would come in at? Granted, there shouldn’t be a need for one of course, but it does make me curious. I’m glad you were able to sell this one off and I’m sorry to hear how frustrating it was during the process.

          I just reviewed an apprasial this morning and the value was reconciled to the lower end of the market. The comps that were given the most weight were distressed properties. REOs and Short Sales dominate in the market, but traditional sales were seemingly looked over.

          Best wishes on your next properties, Emerson. Thanks for the conversation.

  6. Emerson Racca says

    Hey Ryan:

    Happy Holidays! I hope the year ended well with you. “Gung Hay Fat Choi” to you in the coming year.

    I have a question for you. I recently went into escrow with another investment property that I am flipping. I had two good buyers from a total of three multiple offers. The first came close to the asking price with concessions. The second offer was $500 less than the asking price without concessions. I naturally took the second. When the first FHA appraisal report came in, the property was valued at $10,000.00 less than the contract price. I looked at the appraisal report and agreed with it, but my question is this —

    With the inherent design of an appraisal, how are property values going to increase? An FHA loan is approved if the purchase price is less or the same as the appraised value. If the home sells for less, the selling price creates a lower comparable value for the next sale. No one is going to pay more than its worth.

    Emerson Racca

    • says

      Thanks so much, Emerson. Happy New Year to you too!! I was out of town for a week, so sorry for the delayed response. I’m curious if you had a second FHA appraisal on this property done on the property in light of being a flip. Did that one come in higher or lower than the first appraisal?

      Good question. An appraiser doesn’t only look at the sales price, but also if the sales price was really at a market level. For example, a model match short sale might close 10% lower than your flipped house in light of being aggressively marketed. While your house and the short sale may be identifical in condition and all other factors, the lower sale does not now mean that buyers will only pay 10% less for houses because of that one sale. I bring this up because apprisers need to sift through all sales and really look at exposure time, financing and so many factors to grasp what the market is doing. Granted, if there are legitimately low appraisals in a neighborhood over time, that’ll definitely impact the market and probably what buyers are willing to pay.

      Ultimately, the market will appreciate as supply and demand mingle and demand outweighs supply at some point. Imagine a scenario where the latest sales were at $150,000, but all other model match sales in the same neighborhood are in contract at $175,000. Something would have had to have happened in the economy or local neighborhood for prices to jump like this. If there was a scenario like this and there were conventional buyers lining up with 20% down and not asking for concessions, it would be difficult to argue the market was still at $150,000 despite the market looking that way on paper.

      I’m not sure if I’m hitting the answer to your question or not, so feel free to follow-up. I’m always glad to keep conversation going.

  7. Lisa says

    My husband and I are in a nightmare. We have been trying to buy a house for 8 months now. The latest hiccup is the appraisal. The company that did our first appraisal (a repaired value)- also did the AS-IS appraisal for HUD who is selling the house. The lender at first said it was a conflict of interest to use the first appraisal. The appraiser also had several inaccuracies in her report. Her comps were futher away than the report listed. She stated there was an attic, which there was none, she listed the wrong amount of rooms, and mislabeled pictures. She also used pictures from the HUD AS-IS appraisal. The lender ordered a second appraisal, which everything was accurate, but the price came out higher, so they say they have to use the first one- and they should have never ordered the second one. I would appreciate any feedback. Thank you.

    • says

      HUD will side with the lower appraisal. Why is it a problem to have the lower appraisal though? If you are doing a 203K loan, will the lower number work for the loan to cover the main repairs? Hopefully there is enough room in there for you to maybe remove any repairs that were maybe more preferences than necessities (if that was the case). I wonder if the first appraisal will expire soon though, so maybe another one could be done. If I’m not mistaken, I believe an FHA appraisal will stick with the property for 90 or 120 days. Have you spoken directly with HUD too? I would recommend that. 800-CALL-FHA.

  8. says

    We offered on a short sale house for 199k about 3 months ago. Now homes around that one is selling for 165-185k. Appraisal report valued at 199k, 2 wks into closing. We want 2nd appraisal on fha. Is that possible? We feel appraiser did not compared homes closer to this one and did of those in further areas ranging above 185-210k. The county assessor valued this home at 168k. We hope 2nd appraisal with homes closer to this one will prove value is lower and lower of payments. We want to buy this house but not to live in disappointment and regretful that we offered 199k and city assessed value is 168k.

    • says

      Hi Ann. Thank you for the comment. There are a few issues here:

      1) Are the homes for sale distressed sales? Sometimes short sales and foreclosures (or homes with some sort of negative condition issue) tend to sell for less. Obviously your short sale was priced higher, but I’m initially wondering what is causing the price difference. Is yours the sole inflated price or is there a reason why everything else is lower?

      2) Are the homes in further areas located in superior neighborhoods? It sounds like you’re saying homes in the subject property’s neighborhood are at a lower range. That is a big issue if the appraiser went out further to find “comps” to support the sales price, while ignoring the lower sales in the immediate neighborhood. If that’s what happened, you should be concerned.

      3) The Assessor’s value might not the same as market value for today. I don’t know how things work in your area, but there are many good reasons not to give weight to the Assessor’s value because it’s not usually based on market value for the same date you are purchasing a property. I rarely see the two values line up in my area. If you are in California or a state similar to CA, have a read at my post, “But my neighbor pays less than me in property taxes” to glean some insight (http://sacramentoappraisalblog.com/2011/09/28/but-my-neighbor-pays-less-than-me-in-property-taxes/). If your state is anything like mine, this may help you out. However, it still does not mean you are not overpaying though.

      4) If you think the appraisal is inflated, you ought to talk with your loan officer. What does the loan officer think? What does your Realtor think? If you are concerned further, you might see what FHA has to offer on the matter (I’m thinking maybe your loan is an FHA loan since you commented on this post. Maybe not though). If it is an FHA loan, you can call them at 800-CALL-FHA. However, talk with your loan officer first and ask the loan officer what your options are. The LO should be your advocate and make sure you are not overpaying. The LO should have an understanding of what to do when this happens also.

      5) Ultimately you can hire an independent appraiser in your area to do an appraisal. Find someone who is trustworthy and not connected to any of the agents in your transaction. This may help you understand the market. However, it’s not a guarentee the seller will agree with the new value either.

      Best wishes.

  9. Schael says

    My husband and I found a perfect house, it was listed for $40,000.00 we offered $55,000.00 and the offer was accepted. It is a HUD house and the currant appraisal of $40,000 is about to expire. Our lender said he would require a second appraisal in order to justify the offer price. Every house in the area of equal or lesser size has sold for $55,000 or more. However, if it apprases for the same amount or HUD refuses we would need to come up with the difference, which we don’t have. Everyone involoved is confident it will appraise higher and HUD will ok it. What are the chances of HUD approving a second appraisal?

    • says

      That’s a sticky situation Schael. It’s always risky to offer more in these situations, though I can understand your rationale. When was the previous appraisal completed? If it is an older appraisal and the market has since increased, that is definitely something to be had in your favor. Honestly, I am never on the deciding end of loans like this, so I don’t really know what the success rate is for situations as such. I do know it is definitely possible for a second appraisal (obviously) to be used so HUD can reconsider the issue. I hope everyone’s confidence is rooted in reality. Please keep me posted how it goes. I hope things end well for you.

  10. says

    If the time between the last transfer date and the date of the purchase contract are within 91 to 180 days and the appraised value is more than 100% of the previous value, then a full 2nd appraisal is required.This is very common on FHA loans when financing a Quick Turn property from investors.

    You don’t have to worry that much.Usually the second appraisal will confirm the first one, unless there is a real discrepancy in numbers. In the nutshell, the lender is just looking for a way the have peace of mind when funding a this kind of property.That’s all.

    • says

      Thanks Charly. I appreciate your insight. Lenders can definitely choose to side with one of the appraisals too if that appraisal makes more sense for whatever reason. Ideally of course they will be the same value or very close to one another.

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